10-K: Annual report pursuant to Section 13 and 15(d)
Published on February 23, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] |
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended |
Commission file number: 1-7945
DELUXE CORPORATION
(Exact name of registrant as specified in its charter)
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Minnesota
(State or other jurisdiction of incorporation or organization)
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41-0216800
(I.R.S. Employer Identification No.)
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3680 Victoria St. N., Shoreview, Minnesota
(Address of principal executive offices)
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55126-2966
(Zip Code)
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Registrant’s telephone number, including area code: (651) 483-7111
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $1.00 per share
(Title of each class)
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New York Stock Exchange
(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [X] Yes [ ] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company . See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] |
Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) |
Smaller reporting company [ ] |
Emerging growth company [ ] |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the registrant is $3,311,141,538 based on the last sales price of the registrant's common stock on the New York Stock Exchange on June 30, 2017. The number of outstanding shares of the registrant's common stock as of February 13, 2018 was 47,923,566 .
Documents Incorporated by Reference: Portions of our definitive proxy statement to be filed within 120 days after our fiscal year-end are incorporated by reference in Part III.
DELUXE CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
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Page |
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PART I
Item 1. Business.
Deluxe Corporation was founded in 1915 and was incorporated under the laws of the State of Minnesota in 1920. Our principal corporate offices are located at 3680 Victoria Street North, Shoreview, Minnesota 55126-2966. Our main telephone number is (651) 483-7111 and our web address is www.deluxe.com.
COMPANY OVERVIEW
Over 100 years ago, Deluxe Corporation began providing payment solutions. Our longevity is a testament to our innovation and our ability to evolve with our customers. Over the past several years, we have transformed from being primarily a check printing company to providing a diverse selection of products and services. Our vision is to be the best at helping small businesses and financial institutions grow and we have become a trusted partner to small businesses and an integral part of the financial services industry. We provide a selection of customer life cycle management solutions that help our customers acquire and engage their customers across multiple channels. To promote and sell a wide range of products and services, we use printed and electronic marketing; a direct sales force; referrals from financial institutions, telecommunication clients and other partners; networks of distributors and independent dealers; and an outbound telemarketing group. Over the past 24 months, our Small Business Services segment has provided products and services to approximately 4.4 million small business customers and our Direct Checks segment has provided products and services to more than 5.1 million consumers. Through our Financial Services segment, we provide products and services to approximately 4,900 financial institution clients.
Our product and service offerings are comprised of the following:
Checks – We remain one of the largest providers of checks in the United States. During 2017, checks represented 39% of our Small Business Services segment's revenue, 43% of our Financial Services segment's revenue and 84% of our Direct Checks segment's revenue.
Marketing solutions and other services (MOS) – We offer products and services designed to meet our customers’ sales and marketing needs, as well as various other service offerings. Our marketing products include digital printing and web-to-print solutions such as business cards, print marketing, promotional goods and apparel. Our web services offerings include logo design; hosting, domain name and web design services; search engine optimization; and marketing programs, including email, mobile and social media. We also offer fraud protection and security services, online and offline payroll services, and electronic checks ("eChecks"). Our Financial Services segment also offers a selection of financial technology ("FinTech") solutions. These solutions include data-driven marketing solutions, including outsourced marketing campaign targeting and execution; treasury management solutions, including accounts receivable processing and remote deposit capture; and digital engagement solutions, including loyalty and rewards programs. During 2017, MOS represented 34% of our Small Business Services segment's revenue, 55% of our Financial Services segment's revenue and 11% of our Direct Checks segment's revenue.
Forms – Our Small Business Services segment is a leading provider of printed forms to small businesses, including deposit tickets, billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. This segment also offers computer forms compatible with accounting software packages commonly used by small businesses. Forms sold by our Financial Services and Direct Checks segments include deposit tickets and check registers.
Accessories and other products – Small Business Services offers products designed to provide small business owners with the customized documents necessary to efficiently manage their business, including envelopes, office supplies, ink stamps and labels. Our Financial Services and Direct Checks segments offer checkbook covers, labels and ink stamps.
Revenue, by product and service category, as a percentage of consolidated revenue for the years ended December 31 was as follows:
2017 |
2016 |
2015 |
2014 |
2013 |
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Checks |
43.3 |
% |
46.8 |
% |
49.3 |
% |
52.0 |
% |
55.8 |
% |
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Marketing solutions and other services |
38.4 |
% |
33.4 |
% |
30.0 |
% |
25.5 |
% |
21.6 |
% |
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Forms |
10.8 |
% |
11.6 |
% |
12.2 |
% |
13.0 |
% |
12.7 |
% |
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Accessories and other products |
7.5 |
% |
8.2 |
% |
8.5 |
% |
9.5 |
% |
9.9 |
% |
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Total revenue |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
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BUSINESS SEGMENTS
Our business segments are generally organized by the type of customer served and reflect the way we manage the company. Additional information concerning our segments appears under the caption “Note 16: Business segment information” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Small Business Services
Small Business Services operates under various brands, including Deluxe®, Safeguard®, PsPrint®, Hostopia®, Aplus.net®, VerticalResponse®, Digital Pacific®, Inkhead®, PAYweb® and Payce®, among others. This is our largest segment in terms of revenue and operating income and we are concentrating on profitably growing this segment. Small Business Services strives to be a leading supplier to small businesses, as well as partners and channels that support small businesses, by providing personalized products and services that help them operate and market their businesses. This segment sells products and services to small businesses in North America, Australia and portions of South America and Europe.
Small Business Services' products are distributed through multiple channels. Our primary customer acquisition methods are direct response mail and internet advertising; referrals from financial institutions, telecommunications clients and other partners; affiliate relationships; networks of distributors and independent dealers; a direct sales force that focuses on selling to and through major accounts; and an outbound telemarketing group. Customer service for initial order support, product reorders and routine service is provided by a network of call center representatives located in the United States, Canada and Australia.
Our Small Business Services strategies are as follows:
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Effectively acquire and retain customers by optimizing each of our sales channels; |
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Expand sales of higher growth and recurring MOS offerings; |
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Increase our share of the amount small businesses spend on the types of products and services in our portfolio through increased brand awareness, channel coverage, and improved customer acquisition; and |
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Continue to optimize our cost and expense structure. |
To support our strategies and to reposition Small Business Services as not just a provider of business checks and printed forms, but also as a provider of higher growth MOS offerings, we have two strategic focus areas:
1. |
Web services: |
* |
Improve the digital marketing customer experience and cross-sell across all customers and channels, including through our integrated Deluxe Marketing Suite, while continuing to build partnerships and explore acquisition opportunities. |
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Accelerate our brand awareness transformation, building a clear linkage between marketing and revenue-generating capabilities. |
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Focus on scaling payroll services and continue to evaluate early stage businesses and other operational annuity growth solutions. |
2. |
Payments and marketing solutions: |
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Focus on core check retention and acquisition and on developing incremental retail customer acquisition channels. |
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Profitably scale integrated marketing-on-demand solutions, with the largest opportunity in major accounts. |
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Optimize electronic payment solutions with a focus on building opportunities with financial institutions, medical and insurance payment processors, accounting services and software providers, and other document management and payment solution companies. |
In support of our strategies, we expect to continue identifying opportunities to expand sales to our existing customers and to acquire new customers, including the small business customer referrals we receive through our Deluxe Business Advantage® program. This program provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses. Our relationships with financial institutions are important in helping us more deeply serve unique customer segments such as contractors, retailers and professional services firms. In addition, we expect to continue to acquire customers through our affiliate partners, telecommunications clients, media partners and major account clients. We invest in our e-commerce and technology platforms to increase opportunities to market and sell online, and we utilize various marketing channels, including internet, direct mail solicitations and television. Our distributor and dealer networks and our major accounts channel increase our distribution reach through dedicated “feet on the street,” resellers and partner operations, and allow us to increase sales to existing customers and acquire new customers via multiple methods.
We continuously evaluate ways to strengthen our portfolio of products and services through acquisitions, partnerships and internal development. In recent years, we have acquired a number of businesses that have expanded our MOS offerings, including technology-based solutions such as web services, payroll services, web-to-print capabilities, internet marketing services and eChecks. Sales of these higher growth products and services are expected to represent an increasing portion of our revenue. Additional information concerning our acquisitions appears under the caption “Note 5: Acquisitions” of the Notes to
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Consolidated Financial Statements appearing in Item 8 of this report. In addition, we track innovations within the marketplace coming from competitors, best-of-breed companies and evolving technology products and communities. When making decisions regarding the technologies and methodologies to employ within our product and service areas, we incorporate leading new techniques when they meet our fundamental need for scale, performance, flexibility and security. We also monitor feedback from our customer channels to ensure we are offering the products and features our customers want.
We continue our efforts within Small Business Services to simplify processes, eliminate complexity and lower costs. Small Business Services outsources the production of many of its products, including certain business forms, promotional products and apparel. In conjunction with our cost reduction initiatives, we strive to further enhance our strategic supplier sourcing arrangements. In addition, the expertise we have developed in logistics, productivity and inventory management has allowed us to reduce the number of facilities we operate, while still meeting customer requirements. During 2017, we closed a retail packaging sales location in Dallas, Texas. During 2016, we closed a call center located in Los Angeles, California, a warehouse located in Houston, Texas and a facility housing general office space in Burnsville, Minnesota. During 2015, we closed a facility located in American Fork, Utah that housed a call center and administrative functions, as well as a call center located in Charlotte, North Carolina and a sales facility located in Venice, California. The operations of these facilities were integrated into existing Small Business Services operations.
Financial Services
Financial Services' products and services are sold primarily through a direct sales force, which executes product and service supply contracts with our financial institution clients, including banks, credit unions and financial services companies. Building on our long-standing reputation in the financial services industry as a leading check provider, we have expanded our offerings to include a growing selection of software and cloud-based products and services designed to help financial institutions better address the needs of their customers throughout the customer life cycle. Our sales force is selling these life cycle management solutions through our existing financial institution customer channel to existing clients and to new clients. In addition, certain of our service offerings, such as digital engagement solutions, are sold to clients other than financial institutions.
Our Financial Services strategies are as follows:
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Expand sales of higher growth MOS offerings that differentiate us from the competition; |
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Optimize core check revenue streams and acquire new clients; and |
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Continue to optimize our cost and expense structure. |
We have two focus areas that support our Financial Services strategies:
1. |
Data-driven marketing solutions: |
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Leverage data-driven analytics and marketing capabilities to grow financial institution depository and lending products, and assess new acquisitions. |
2. |
Treasury management solutions: |
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Profitably scale our treasury management solutions. |
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Further integrate previous acquisitions and execute additional acquisitions. |
Despite the decline in check usage, checks continue to be an important source of revenue. Our check supply contracts usually range in duration from 3 to 6 years. As part of our check programs, we provide enhanced services such as customized reporting, file management, expedited account conversion support, fraud protection services, new account support, trackable delivery and billing services. Consumers typically submit their check order to their financial institution, which then forwards the order to us. However, consumers may also submit their check orders over the phone or internet. We process the order and ship it directly to the consumer. We also continue to leverage our Deluxe Business Advantage program, which is designed to maximize financial institution business check programs. It offers many of the products and services of our Small Business Services segment to the small business customers of financial institutions through a number of service level options. The revenue from the products and services sold through this program is reflected in our Small Business Services segment.
In our ongoing efforts to expand our client relationships with relevant growth services, we offer several solutions designed to help financial institutions operate more effectively and better address the needs of their customers throughout the customer life cycle. All of these offerings build on our reputation as a longstanding and trusted partner of financial institutions, especially when it comes to outsourced solutions and securely managing sensitive customer data. Our service offerings include the following:
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Deluxe Marketing Solutions – a variety of direct marketing solutions that help financial institutions acquire new customers, deepen existing customer relationships and retain customers. These offerings leverage data and analytics to help our clients execute marketing campaigns for deposit and lending products across multiple contact channels, including direct mail, email, online and other digital media. These offerings were augmented by the December 2016 acquisition of FMCG, a provider of data-driven marketing solutions for financial institutions, and the October 2015 acquisition of Datamyx®, a software-as-a-service data and analytics platform focused on marketing programs for lending products.
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• |
Deluxe Treasury Management – comprehensive treasury management solutions, including accounts receivable processing and remote deposit capture, available at the customer site and as software-as-a-service and business process outsourced deployment models. These solutions include the offerings of RDM Corporation, which was acquired in April 2017, Data Support Systems, which was acquired in October 2016, and FISC Solutions, which was acquired in December 2015. |
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Deluxe Rewards – a loyalty and rewards platform that offers multiple touch points that enable our clients to have ongoing engagement with their customers. |
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Deluxe Strategic Sourcing – a comprehensive, outsourced service that enables financial institutions to improve efficiency, financial controls and pricing compared to self-managing multiple supplier relationships. |
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Banker's Dashboard® – online financial management tools that provide financial institutions with comprehensive daily insights into their financial picture.
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Provent® – a comprehensive suite of identity protection services largely complementary to our check offerings.
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We continue to advance our MOS offerings both via acquisitions and internal development. In recent years, we have acquired a number of businesses that have expanded our MOS offerings, including data and analytics-driven marketing solutions and treasury management solutions. Sales of these higher growth services are expected to represent an increasing portion of our revenue. Additional information concerning our acquisitions appears under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. We expect that providing a growing selection of products and services will offset the impacts of the decline in check usage and the continued pricing pressure we are experiencing in our check programs. As such, we focus on accelerating the pace at which we introduce new products and services, utilizing client feedback and market research to identify client needs and gaps. We have also invested in extending the Deluxe brand to increase brand awareness and loyalty in the financial services market beyond check-related solutions.
Financial Services continues to simplify processes, eliminate complexity and lower costs. During 2017, we closed administrative facilities located in Omaha, Nebraska and Lincoln, Nebraska. During 2016, we closed a warehouse located in Nashville, Tennessee and during 2015, we closed a call center located in Plymouth, Michigan, as well as a warehouse located in Livonia, Michigan. The operations of these facilities were integrated into existing Financial Services operations.
Direct Checks
Direct Checks is the nation's leading direct-to-consumer check supplier, selling under various brand names, including Checks Unlimited®, Designer Checks®, Checks.com®, Check Gallery®, The Styles Check Company®, and Artistic Checks®, among others.
We use a variety of direct marketing techniques to acquire new customers, including newspaper inserts, in-package advertising, statement stuffers and co-op advertising. We also use search engine marketing and search engine optimization strategies to direct traffic to our websites, which include: checksunlimited.com, designerchecks.com, checks.com, 4checks.com, checkgallery.com, styleschecks.com, and artisticchecks.com, among others.
Direct Checks competes primarily on price and design. We believe that pricing in the direct-to-consumer channel is generally lower than retail prices charged to consumers in the financial institution channel. We compete on design by seeking to offer the most attractive selection of images with high consumer appeal, many of which are licensed from well-known artists and organizations.
Our Direct Checks strategies are as follows:
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Maximize the lifetime value of customers by selling new features, accessories and products; |
• |
Continue to optimize our cost and expense structure; and |
• |
Optimize cash flow. |
We market our products and services through targeted advertising, focusing on the internet channel. We continue to explore avenues to expand sales to existing customers through sales of accessories and other check-related products and services. One such example is the check protection service we offer in partnership with EZShield, Inc., which provides reimbursement to consumers for losses resulting from forged signatures or endorsements and altered checks. As in our other two business segments, Direct Checks continues to simplify processes, eliminate complexity and lower costs. We continue to identify additional opportunities to lower our cost and expense structure in all functional areas, particularly in the areas of marketing and fulfillment.
MANUFACTURING AND FULFILLMENT/SUSTAINABLE PRACTICES
We continue to focus on improving the customer experience by providing excellent service and quality, reducing costs and increasing productivity. We accomplish this by embedding lean operating principles in all processes, while emphasizing a culture of continuous improvement. Under this approach, employees work together to produce products, rather than working on
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individual tasks in a linear fashion. Because employees assume more ownership of the end product, we experience improved quality and productivity, as well as lower costs.
We continue to sponsor “sustainability” initiatives that encompass environmentally-friendly practices. We have aligned with suppliers that promote sustainable business practices and we seek opportunities to eliminate wasted material, reduce cycle times and use more environmentally-friendly materials. More than 90% of our check and form paper is purchased from Forest Stewardship Council certified supplier mills and we use environmentally-friendly janitorial supplies. Our sustainability initiatives have also benefited our results of operations over the past several years as we focus on reducing our consumption of water, electricity and natural gas, and improving our transportation efficiency. We continue efforts to reduce solid waste sent to landfills, and we have been a member of the Environmental Protection Agency's Green Power Leadership Club since 2010. The renewable energy that we purchased during 2017 amounted to approximately 82% of our annual United States electricity needs.
Our expertise in logistics, productivity and inventory management has allowed us to reduce the number of production facilities we operate, while still meeting customer requirements. During 2017, we closed our Westlake Village, California fulfillment operation, during 2016, we moved production out of our Lancaster, California manufacturing facility, and during 2015, we closed our Plymouth, Michigan and Burnsville, Minnesota fulfillment operations. These operations were moved to other existing locations.
We have a shared services approach, which allows our 3 business segments to leverage shared manufacturing facilities to optimize capacity utilization, enhance operational excellence and foster a culture of continuous improvement. We continue to reduce costs by utilizing our assets and printing technologies more efficiently and by enabling employees to better leverage their capabilities and talents.
INDUSTRY OVERVIEW
Checks
According to the Federal Reserve study released in December 2016, debit card, credit card and ACH payments all exceeded the number of checks written in 2015. Approximately 19.4 billion checks were written in 2015, accounting for approximately 13% of all non-cash payment transactions. This is a reduction from the Federal Reserve Study released in December 2013 when checks written accounted for approximately 17% of all non-cash payment transactions. Checks written includes check payments and checks converted to ACH payments, which uses the check as a source document to initiate the ACH payment. The Federal Reserve estimates that checks written declined at an annual rate of approximately 4.8% between 2012 and 2015, a slower decline than the 8.8% annual decline documented between 2009 and 2012. In December 2017, the Federal Reserve released a supplement to its 2016 study. This supplement did not update the data regarding checks written; however, it did indicate that the annual decline in check payments was 3.1% between 2012 and 2015, lower than the December 2016 estimate of 4.4%. In 2018, we anticipate check orders to decline approximately 7%, slightly higher than our 2017 decline rate. We expect that the number of checks written will continue to decline due to the increasing use of alternative payment methods, including credit cards, debit cards, direct deposit, wire and ACH transfers, and internet-based bill paying services, as well as automated teller machines.
In addition, steps have been taken in the development of a real-time payments system in the United States. The Federal Reserve established the Faster Payments Task Force with the objective of identifying and evaluating approaches for implementing a faster payments system. In late 2017, The Clearing House Payments Company, LLC (TCH) implemented a clearing and settlement system allowing consumers and businesses to send and receive payments in real-time directly from their accounts at financial institutions. The National Automated Clearing House Association (NACHA) adopted Same-Day ACH rules to speed up the processing of ACH payments and systems such as Zelle®, Venmo®, Apple Pay® and various other mobile applications allow individuals to transfer funds to other users. In addition, cryptocurrencies have been gaining acceptance in the marketplace. We cannot predict the rate and the extent to which alternative payment methods will achieve acceptance and replace checks, whether as a result of legislative developments, changing payment systems, personal preferences or otherwise.
In addition to the shift to electronic payment methods, consumer spending, employment levels, and housing stock and starts also impact the number of checks consumers use. We estimate that the 2017 growth rates for consumer spending and private sector employment most likely had a neutral impact on our personal check businesses. An increase in housing stock and starts has a positive impact on the number of checks purchased, as new households typically are in need of new checks. According to statistics released by the United States Census Bureau in January 2018, housing units completed during 2017 increased almost 9% as compared to 2016. We cannot predict whether these economic trends will improve, stay the same or worsen in the near future.
Small Business Customers
According to data published by the United States Census Bureau, there were approximately 31 million small businesses in the United States in 2015, defined as independent businesses having fewer than 500 employees. According to data published
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by Statistics Canada, there were approximately 4 million small businesses in Canada in 2016, defined as employer businesses with fewer than 100 employees.
In recent years, we believe the economy negatively impacted our operating results and/or our growth opportunities in our Small Business Services segment. We believe small businesses are more likely to be significantly affected by economic conditions than larger, more established companies. During a sluggish economy, it may be more difficult for small businesses to obtain credit and small businesses may choose to spend their limited funds on items other than our products and services. In addition, the December 2017 repeal of net neutrality rules could negatively affect our small business customers. If small businesses are forced to pay higher fees to maintain adequate speeds for their websites, it could reduce their spending on our products and services. The National Federation of Independent Business (NFIB) publishes the results of quarterly surveys which provide an indication of small business owners' view of economic conditions. The index of small business optimism published by the NFIB in December 2017 was 104.9, down slightly from 105.8 in December 2016. For 2017, the average index was 104.8, up significantly from the 96.3 average in 2016. At the same time, the net percent of small business owners expecting general business conditions to be better in 6 months declined to 37% in December 2017, as compared to 50% in December 2016. Although there continues to be some optimism from small business owners, including some belief that they will benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017, we cannot predict whether sustainable positive trends will translate into economic growth. We also cannot predict whether economic trends will improve, stay the same or worsen in the near future.
Sales of business checks and forms have been declining, and we expect this trend to continue. In addition to the decrease in the use of checks due to the availability of alternative payment methods, continual technological improvements have provided small business customers with alternative means to execute and record business transactions. For example, because of the lower price and higher performance capabilities of personal computers, printers and mobile devices, small businesses now have alternate means to print many business forms. Additionally, electronic transaction systems, off-the-shelf business software applications, web-based solutions and mobile applications have been designed to replace pre-printed business forms. Greater acceptance of electronic signatures also contributes to the overall decline in printed products. It is difficult to predict the pace at which these alternative products and services will achieve widespread acceptance and replace standardized business forms.
Financial Institution Clients
Checks are most commonly ordered through financial institutions, including banks, credit unions and other financial services companies. As such, several developments related to financial institutions have affected the check printing portion of the payments industry.
Financial institutions seek to maintain the profits they have historically generated from their check programs, despite the decline in check usage. This continues to put significant pricing pressure on check printers. In addition, the number of potential financial institution clients in the United States is declining. According to statistics currently available online from the Federal Deposit Insurance Corporation and the Credit Union National Association, the number of financial institutions has been declining for many years. When financial institutions consolidate through mergers and acquisitions, often the newly combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply contracts. This results in check providers competing intensely on price in order to retain not only their previous business with one of the financial institutions, but also to gain the business of the other financial institution in the merger/acquisition. Financial institution mergers and acquisitions can also impact the duration of our contracts. Normally, the length of our supply contracts with financial institutions ranges from 3 to 6 years. However, contracts may be renegotiated or bought out mid-term due to a consolidation of financial institutions. Banks, especially larger ones, may request prepaid product discounts in the form of cash incentives payable at the beginning of a contract. These contract acquisition payments negatively impact check producers' cash flows at the beginning of these contracts. To the extent financial institution failures and consolidations impact large portions of our customer base, this could have a significant impact on our financial institution check programs.
Direct Mail Response Rates
Direct Checks and portions of Small Business Services have, at times, experienced declines in response rates related to direct mail promotional materials. While we believe that media response rates have declined across a wide variety of products and services, we believe that the declines we have experienced are also attributable to the decline in check usage, the gradual obsolescence of standardized forms and the increasing use of e-commerce by both consumers and small businesses. We continually evaluate and redirect our marketing techniques in order to utilize the most effective and affordable advertising media.
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Competition
Suppliers of small business services and supplies are highly fragmented and geographically dispersed, with many small local suppliers, large national retailers and internet-based providers. In these markets, the competitive factors influencing a customer's purchase decision are breadth and quality of product and service offerings, ease of use of web and other services, price, speed of delivery, convenience, the responsiveness and quality of customer support, and past experience with the supplier. Our primary competitors include traditional storefront printing companies; office superstores; companies offering website design and hosting and domain name registration; wholesale printers; online printing companies; email and social media marketing services companies; small business products and services resellers; media directory providers; and online and off-line suppliers of custom apparel, promotional products and customized gifts. Additionally, the competitive landscape for online small business suppliers continues to be challenging as new internet businesses are introduced and traditional businesses establish an online presence. We believe we are well-positioned in this competitive landscape through our broad customer base, including limited international expansion in web services, the breadth of our small business product and service offerings, multiple distribution channels, established relationships with our financial institution and telecommunications clients and other partners, competitive pricing tiers, ease of use of our web and other services, high quality and dependable service.
In the check printing portion of the payments industry, we face considerable competition from another large check printer in our traditional financial institution sales channel, from direct mail and internet-based sellers of personal and business checks, from check printing software vendors and from some retailers. We expect competition to remain intense as check usage continues to decline. Moreover, the check product must compete with alternative payment methods, including credit cards, debit cards, direct deposit, wire transfers, internet-based bill paying services and digital wallet applications, as well as automated teller machines. The principal factors on which we compete are product and service breadth, price, quality and check merchandising program management. We believe the key items which differentiate us from our competition include our fully automated flat check delivery package, our online performance dashboard and portal analytics tools for financial institution branches, our personalized customer call center experience, and our Deluxe Business Advantage program, which provides a fast and simple way for financial institutions to offer expanded personalized service to small businesses. In addition, to provide our small business customers with an online payment solution, our Small Business Services segment offers eChecks.
At times, check suppliers have reduced the prices of their products during the supplier selection process in an attempt to gain greater volume. The corresponding pricing pressure has negatively impacted our profit margins. Pricing pressure will continue to impact our results of operations through lower pricing levels or client losses. Additionally, product discounts in the form of cash incentives payable to financial institutions upon contract execution are a common practice within the industry. Both the number of financial institutions requesting these payments and the size of the payments has fluctuated in recent years. These up-front payments negatively impact check printers' cash flows at the beginning of the contracts, so we attempt to minimize them by structuring new contracts with alternative incentives throughout the duration of the contract.
Our Financial Services MOS offerings also face intense competition, including competition from financial institution core banking software providers, advertising agencies, providers of data and analytics marketing solutions, and numerous financial technology services providers offering services such as customer and account acquisition, fraud and security risk management, receivables management and treasury support services, and rewards and loyalty solutions. We expect the intensity of competition to increase from established and emerging financial technology companies. The competitive factors affecting Financial Services MOS offerings include breadth and quality of services, ease of use, price, solution completeness, responsiveness and quality of customer support, as well as the ability to manage end-to-end financial institution processes.
Seasonality
We experience seasonal trends in sales of some of our products. For example, holiday card and retail packaging sales and revenues from rewards and loyalty solutions, as well as search and email marketing, are typically stronger in the fourth quarter of the year due to the holiday season. Sales of tax forms are stronger in the first and fourth quarters of the year, and check sales for our Direct Checks segment have historically been stronger in the first quarter of the year. In addition, we may experience some fluctuations in revenue driven by our customers' marketing campaign cycles.
Materials, Supplies and Service Providers
The principal materials used in producing our main products are paper, plastics, ink, cartons and printing plate material, which we purchase from various sources. We also purchase stock business forms and promotional apparel produced by third parties. We believe that we will be able to obtain an adequate supply of materials from current or alternative suppliers.
We have entered into agreements with third-party providers for information technology services, including telecommunications and network server and transaction processing services. We also rely upon third parties to provide a portion of the data used to maintain our proprietary and non-proprietary databases, including credit and non-credit data from the national credit bureaus and other data brokers. We believe we would be able to obtain an alternative source of supply if one or more of our service providers failed to perform.
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Governmental Regulation
We are subject to numerous international, federal, state and local laws and regulations that affect our business activities in areas including, but not limited to, labor, advertising, taxation, data privacy and security, digital content, consumer reports, consumer protection, online payment services, real estate, e-commerce, intellectual property, health care, environmental matters, and workplace health and safety. The cost of complying with these laws and regulations is significant and regulators may adopt new laws or regulations at any time. We believe that our business is operated in substantial compliance with all applicable laws and regulations. Further information regarding the impact of specific laws and regulations can be found in Item 1A of this report. At this time, we are not aware of any changes in laws or regulations that will have a significant impact on our business during 2018, with the exception of the Tax Cuts and Jobs Act that was enacted in December 2017 (the 2017 Act). We expect that our annual effective income tax rate for 2018 will be approximately 25% and we expect that our total tax payments in 2018 will be approximately $25.0 million less than in 2017, driven primarily by the 2017 Act.
Intellectual Property
We rely on a combination of trademark and copyright laws, trade secret and patent protection, and confidentiality and license agreements to protect our trademarks, software and other intellectual property. These protective measures afford only limited protection. Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products or services that do not infringe on our intellectual property rights, either of which may adversely impact our results of operations. In addition, we may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities.
EMPLOYEES
As of December 31, 2017, we employed 5,119 employees in the United States, 657 employees in Canada and 110 employees in Australia and Europe. None of our employees are represented by labor unions, and we consider our employee relations to be good.
AVAILABILITY OF COMMISSION FILINGS
We make available through our investor relations website, Deluxe.com/investor, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after these items are electronically filed with or furnished to the SEC. These reports can also be accessed via the SEC website, sec.gov, or via the SEC's Public Reference Room located at 100 F Street N.E., Washington, D.C. 20549. Information concerning the operation of the SEC's Public Reference Room can be obtained by calling 1-800-SEC-0330.
A printed copy of this report may be obtained without charge by calling 651-787-1068, by sending a written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box 64235, St. Paul, Minnesota 55164-0235, or by sending an email request to investorrelations@deluxe.com.
Further information about Deluxe Corporation is also available at Deluxe.com, facebook.com/deluxecorp and twitter.com/deluxecorp.
CODE OF ETHICS AND CORPORATE GOVERNANCE GUIDELINES
We have adopted a Code of Business Ethics that applies to all of our employees and our board of directors. The Code of Business Ethics is available on our investor relations website, Deluxe.com/investor, and also can be obtained free of charge upon written request to the attention of Investor Relations, Deluxe Corporation, P.O. Box 64235, St. Paul, Minnesota 55164-0235. Any changes or waivers of the Code of Business Ethics will be disclosed on our website. In addition, our Corporate Governance Guidelines and the charters of the Audit, Compensation, Corporate Governance and Finance Committees of our board of directors are available on our website or upon written request.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are elected by the board of directors each year. The following summarizes our executive officers and their positions.
Name |
Age |
Present Position |
Executive Officer Since |
Lee Schram |
56 |
Chief Executive Officer |
2006 |
Pete Godich |
53 |
Senior Vice President, Fulfillment |
2008 |
Julie Loosbrock |
58 |
Senior Vice President, Human Resources |
2008 |
Malcolm McRoberts |
53 |
Senior Vice President, Small Business Services |
2008 |
John Filby |
55 |
Senior Vice President, Financial Services |
2012 |
Tracey Engelhardt |
53 |
Senior Vice President, Direct-to-Consumer |
2012 |
Michael Mathews |
45 |
Senior Vice President, Chief Information Officer |
2013 |
Amanda Brinkman |
38 |
Vice President, Chief Brand and Communications Officer |
2014 |
Keith Bush |
47 |
Senior Vice President, Chief Financial Officer |
2017 |
Lee Schram has served as Chief Executive Officer since joining us in May 2006.
Pete Godich was named Senior Vice President, Fulfillment in March 2011.
Julie Loosbrock was named Senior Vice President, Human Resources in September 2008.
Malcolm McRoberts was named Senior Vice President, Small Business Services in February 2011.
John Filby was named Senior Vice President, Financial Services in April 2012.
Tracey Engelhardt was named Senior Vice President, Direct-to-Consumer in March 2017. From July 2012 to March 2017, Ms. Engelhardt served as Vice-President, Direct-to-Consumer.
Michael Mathews was named Senior Vice President, Chief Information Officer in March 2017. Mr. Mathews joined us in May 2013 as Vice President, Chief Information Officer. Prior to joining us, Mr. Mathews served as Senior Vice President, Strategy and Enterprise Programs for UnitedHealth Group from July 2009 to May 2013. UnitedHealth Group is a publicly traded diversified health and well-being company that provides health care coverage and benefits services and information and technology-enabled health services.
Amanda Brinkman joined us in January 2014 as Vice President, Chief Brand and Communications Officer. Prior to joining us, Ms. Brinkman was self-employed, operating her own brand agency from January 2013 to December 2013.
Keith Bush joined us in March 2017 as Senior Vice President, Chief Financial Officer. Prior to joining us, Mr. Bush was self-employed as a consultant to the airline industry from July 2016 to March 2017. From June 2009 through July 2016, Mr. Bush served as Senior Vice President, Finance for American Airlines.
Item 1A. Risk Factors.
Our business, prospects, results of operations, financial condition and cash flows could be adversely affected by various risks and uncertainties. These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this Annual Report on Form 10-K. We have disclosed all known material risks. Additional risks not presently known to us, or that we currently believe are immaterial, may also adversely affect us. You should carefully consider all of these risks and uncertainties before investing in our common stock or other securities.
The following important factors could cause our actual results to differ materially from the statements we make from time to time regarding our expected future results, including, but not limited to, forecasts regarding revenue, earnings per share, cash provided by operating activities and expected cost savings. Any forecast reflects various assumptions that are subject to significant uncertainties and, as a matter of course, may prove to be incorrect. Further, the achievement of any forecast depends on numerous factors that are beyond our control. Consequently, we caution investors that forward-looking statements are predictions based on our current expectations about future events and are not guarantees of future performance. The variation of actual results or events from such statements may be material and adverse. You are cautioned not to base your entire analysis of our business and prospects upon isolated statements, and are encouraged to use the entire mix of historical and forward-looking information made available by us, and other information affecting us and our products and services, including the following factors.
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We may not be successful at implementing our growth strategies.
We continue to execute strategies intended to drive sustained revenue and earnings growth with a focus on increasing marketing solutions and other services revenue, particularly treasury management, data-driven marketing solutions and web services. We believe these revenue streams represent our most significant growth opportunity. We have invested and plan to continue investing in several key enablers to achieve our strategies, including strengthening our portfolio of products and services, particularly technology-based solutions; investing in acquisitions; attracting and retaining customers; scaling our service offerings; enhancing brand awareness and positioning; growing our major accounts and dealer networks; and improving the customer experience. Our business strategies could fall short of our expectations for many reasons, including, among others:
• |
our failure to generate profitable revenue growth; |
• |
our failure to acquire new customers, retain our current customers and sell more products and services to current and new customers; |
• |
our inability to identify suitable acquisition candidates or to complete acquisitions on acceptable terms; |
• |
our failure to effectively operate, integrate or leverage the businesses we acquire; |
• |
the failure of our digital services and products to achieve widespread customer acceptance; |
• |
our inability to promote, strengthen and protect our brand; |
• |
our inability to implement improvements to our technology and other key assets to increase efficiency, enhance our competitive advantage and scale our operations; |
• |
our failure to effectively manage the growth, expanding complexity and pace of change of our business and operations; and |
• |
general economic conditions. |
In addition, we are focused on targeting our financial technology ("FinTech") solutions to larger financial institutions. These FinTech offerings include data-driven marketing solutions, including outsourced marketing campaign targeting and execution; treasury management solutions; and digital engagement solutions, including loyalty and rewards programs. If we are able to increase sales of these services to larger financial institutions, we may experience fluctuations in revenue driven by our clients' marketing campaign cycles. This may adversely affect our ability to accurately predict the timing of revenues and to meet short-term expectations of operating results. The resulting customer concentration could also increase our sensitivity to any material, adverse developments affecting our significant customers, and our top customers’ purchasing power could, in some cases, give them the ability to make greater demands with regard to pricing and contractual terms in general.
We can provide no assurance that our growth strategies will be successful either in the short-term or in the long-term, that they will generate a positive return on our investment, or that they will not reduce our operating margins. Additionally, if our strategies are not successful, or if there is market perception that our strategies are not successful, our reputation and brand may be damaged and our stock price may decline.
If we are unable to attract customers in a cost-effective manner or effectively develop and operate a multichannel customer experience, our business and results of operations would be adversely affected.
We use a variety of methods to promote our products and services, including direct mail advertising, email marketing, purchased search results from online search engines, broadcast media, advertising banners, social media and other online links. The profitability of our Direct Checks segment depends in large part on our ability to secure adequate advertising media placements at acceptable rates. We can provide no assurance regarding the future cost, effectiveness and/or availability of suitable advertising media. Additionally, our Direct Checks segment and portions of our Small Business Services segment have, at times, experienced declines in response rates related to direct mail promotional materials. While we believe that media response rates have declined across a wide variety of products and services, we believe that the declines we have experienced are also attributable to the decline in check usage, the gradual obsolescence of standardized forms products and the increasing use of e-commerce by both consumers and small businesses. In an attempt to offset these impacts, we continually modify our marketing and sales efforts and continue to shift a greater portion of our advertising investment to the internet. Competitive pressure may inhibit our ability to reflect increased costs in the prices of our products and new marketing strategies may not be successful. We can provide no assurance that we will be able to offset a decline in response rates, even with additional marketing and sales efforts.
In addition to print and email advertising, many customers come to our websites through internet search engines. If the search engines on which we rely modify their algorithms or terminate their relationship with us, fewer customers may be directed to our websites. As we analyze our overall advertising strategy, we may be forced to resort to more costly resources to replace lost internet traffic, which would adversely affect our results of operations. In addition, the cost of purchased search engine listings will likely increase as demand for them continues to grow, and further cost increases could negatively affect our profitability.
We believe we must maintain a relevant, multichannel experience for our customers. Customers expect to be able to order products and services from us however they please, whether that is via the mail, land-line phone, computer, tablet or
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mobile phone. In particular, smart phones and tablet computing devices are increasingly being used as the primary means for accessing the internet and conducting e-commerce. Designing and purchasing custom products on mobile devices is more difficult than doing so with a traditional computer due to limited screen sizes, bandwidth and other variables. Beyond these difficulties, the development of mobile-oriented user interfaces and other technologies is complex and expensive. We are also dependent on the functionality of our systems with web browsers, mobile devices and operating systems that are controlled by third parties. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers may also impact the ability to access specified content on mobile devices, and with the repeal of net neutrality rules in December 2017, network carriers could, at their discretion, negatively impact the speeds of our websites. In this situation, it may be necessary to pay additional fees for higher internet speeds, which could negatively affect our profitability.
Although we are constantly making investments to update our technology, we cannot predict the success of these investments. Multichannel marketing is rapidly evolving and we must keep pace with the changing expectations of our customers and new developments by our competitors. If we are unable to implement improvements to our customer-facing technology in a timely manner, or if our customer-facing technology does not function as designed, we could find it increasingly difficult to attract new and repeat visitors to our websites and convert these visitors to customers, which would result in decreased revenue.
The check printing and related products portion of the payments industry is mature, and check usage is declining.
Check printing continues to be a significant portion of our business. Revenue generated by the sale of checks was 43% of our consolidated revenue in 2017. We sell checks for personal and small business use and believe that there will continue to be a substantial demand for these checks for the foreseeable future, although the total number of checks written in the United States has been in decline since the mid-1990's. According to the most recent Federal Reserve study released in December 2016, the total number of checks written declined 4.8% each year between 2012 and 2015. We believe that the number of checks written will continue to decline due to the increasing use of alternative payment methods, including credit cards, debit cards, direct deposit, wire and ACH transfers, and internet-based bill paying services, as well as automated teller machines.
In addition, steps have been taken in the development of a real-time payments system in the United States. The Federal Reserve established the Faster Payments Task Force with the objective of identifying and evaluating approaches for implementing a faster payments system. In late 2017, The Clearing House Payments Company, LLC (TCH) implemented a clearing and settlement system allowing consumers and businesses to send and receive payments in real-time directly from their accounts at financial institutions. The National Automated Clearing House Association (NACHA) adopted Same-Day ACH rules to speed up the processing of ACH payments and systems such as Zelle®, Venmo®, Apple Pay® and various other mobile applications allow individuals to transfer funds to other users. In addition, cryptocurrencies have been gaining acceptance in the marketplace.
The rate and the extent to which alternative payment methods will achieve acceptance and replace checks, whether as a result of legislative developments, changing payment systems, personal preference or otherwise, cannot be predicted with certainty. A surge in the popularity of any of these alternative payment methods, or our inability to successfully offset the decline in check usage with other sources of revenue, would have an adverse effect on our business and results of operations.
Small Business Services' standardized business forms and related products face technological obsolescence and changing customer preferences.
Revenue generated by the sale of business forms was 11% of our consolidated revenue in 2017. Continual technological improvements have provided small business customers with alternative means to execute and record business transactions. For example, because of the lower price and higher performance capabilities of personal computers, printers and mobile devices, small businesses now have alternate means to print many business forms. Additionally, electronic transaction systems, off-the-shelf business software applications, web-based solutions and mobile applications have been designed to replace pre-printed business forms. Greater acceptance of electronic signatures also contributes to the overall decline in printed products. It is difficult to predict the pace at which these alternative products and services will achieve widespread acceptance and replace standardized business forms. If small business preferences change rapidly and we are unable to develop new products and services with comparable operating margins, our results of operations would be adversely affected.
We face intense competition in all areas of our business, and we expect that competition will continue to increase.
Although we are one of the leading check printers in the United States, we face considerable competition. In addition to competition from alternative payment methods, we also face intense competition from another large check printer in our traditional financial institution sales channel, from direct mail and internet-based sellers of personal and business checks, from check printing software vendors and from some retailers. In addition, the suppliers of small business and financial services products and services are intensely competitive, highly fragmented and geographically dispersed. Current and potential competitors for our Small Business Services segment include traditional storefront printing companies; office superstores; companies offering website design and hosting and domain name registration; wholesale printers; online printing companies; email and social media marketing services companies; small business products and services resellers; media directory providers; and offline and online suppliers of custom apparel, promotional products and customized gifts. Additionally, the
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competitive landscape for online small business suppliers continues to be challenging as new internet businesses are introduced and traditional businesses establish an online presence. Current and potential competitors for Financial Services service offerings include financial institution core banking software providers, advertising agencies, providers of data and analytics marketing solutions, and numerous FinTech service providers offering services such as customer and account acquisition, fraud and security risk management, receivables management and treasury support services, and rewards and loyalty solutions. In addition, many of our potential financial institution clients have historically developed their key applications in-house and thus, we must compete with their in-house capacities. For financial institutions, switching from one vendor to another can be a significant undertaking, with some potential clients perceiving disadvantages such as loss of accustomed functionality, conversion costs and business disruption. Through our ongoing efforts to expand well beyond our legacy check-related products, we strive to overcome this resistance to changing vendors. We offer several solutions designed to help financial institutions operate more effectively and better address the needs of their customers throughout the customer life cycle, building on our reputation as a longstanding and trusted partner of financial institutions. However, our clients may continue to be reluctant to change suppliers and they may be hesitant to rely on outsourced solutions.
We can provide no assurance that we will be able to compete effectively against current and future competitors. In recent years, our revenue has benefited from price increases in all 3 of our business segments. Pricing is becoming more competitive for product and service providers, as the internet allows customers to easily compare prices. Pricing also continues to be competitive in our financial institution sales channel, as financial institutions seek to maintain their previous levels of profitability, even as check usage declines. We can provide no assurance that we will be able to increase prices in the future while remaining competitive. Continued competition could result in price reductions, reduced profit margins, loss of customers and an increase in up-front cash payments to financial institutions upon contract execution or renewal, all of which would have an adverse effect on our results of operations and cash flows.
Security breaches, computer malware or other cyber attacks involving the confidential information of our customers, employees or business partners could substantially harm our reputation and business.
Information security risks have increased in recent years, in part because of the proliferation of new technologies and increased use of the internet, as well as the increased sophistication and activities of hackers, terrorists and activists, some of which may be linked to hostile nation-state actors. We use internet-based channels that collect customers’ account and credit card information, as well as other sensitive information, including proprietary business information and personally identifiable information of our customers, employees, contractors, suppliers and business partners. We process hundreds of millions of records containing data related to individuals and small businesses. The secure and uninterrupted operation of our networks and systems, and of the processing and maintenance of this information, is critical to our business operations and strategy. We rely on various security procedures and systems to ensure the secure storage and transmission of information, including encryption and authentication technology licensed from third parties. Computer networks and the internet are, by nature, vulnerable to unauthorized access. An accidental or willful security breach could result in unauthorized access and/or use of customer information, including consumers' personally identifiable information. Our security measures could be breached by third-party action, computer viruses, accidents, employee or contractor error, or malfeasance by rogue employees.
Because techniques used to obtain unauthorized access, disable or degrade service, or sabotage computer systems change frequently, may be difficult to detect immediately, and generally are not recognized until they are launched against a target, we may be unable to implement adequate preventive measures. Unauthorized parties may also attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving employees and contractors. We have experienced distributed denial of service attacks by hackers aimed at disrupting internet traffic and/or attempting to place illegal or abusive content on our or our customers’ websites. Additionally, our customers and employees have been and will continue to be targeted by parties using fraudulent "phishing" emails to misappropriate personal information or to introduce viruses or other malware through "trojan horse" programs to our users' computers. To-date, these various threats have not materially impacted our business or financial results. However, we can provide no assurance of a similar result in the future.
Although we invest in a system of information security and controls, a party that is able to circumvent our security measures could misappropriate our or our customers' personal and proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation, all of which could deter clients and consumers from ordering our products and services, and result in the termination of client contracts. Additionally, it is possible that there could be vulnerabilities that could impact large segments of mobile, computer or server architecture. Any of these events would adversely affect our business and financial results. In addition, if we were to experience an information security breach, we may be required to expend significant amounts to remedy, protect against, or mitigate the effect of the breach, and we may not be able to remedy the situation in a timely manner, or at all. We could also be exposed to time-consuming and expensive litigation, government inquiries and/or enforcement actions. If we are unsuccessful in defending a lawsuit regarding information security breaches, we may be forced to pay damages, penalties and fines, any of which would have an adverse effect on our financial results.
In addition, there are federal, state and international laws requiring companies to notify individuals of information security breaches involving their personal data, the cost of which could negatively affect our financial results. These mandatory disclosures regarding an information security breach often lead to widespread negative publicity. If we were required to make
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such a disclosure, it may cause our clients and customers to lose confidence in the effectiveness of our information security measures. Likewise, general publicity regarding information security breaches at other companies could lead to the perception among the general public that e-commerce is not secure. This could decrease traffic to our websites, negatively affect our financial results and limit future business opportunities.
Interruptions to our website operations or information technology systems, or failure to maintain our information technology platform, could damage our reputation and harm our business.
The satisfactory performance, reliability and availability of our information technology systems is critical to our reputation and our ability to attract and retain customers. We could experience temporary interruptions in our websites, transaction processing systems, network infrastructure, service technologies, printing production facilities or customer service operations for a variety of reasons, including, among others: human error, software errors, security breaches, power loss, telecommunications failures, equipment failures, vandalism, fire, flood, extreme weather, terrorism, and other events beyond our control. Furthermore, as we focus resources on our growth strategies, we have reduced our investment in the development of our legacy systems that support our checks and forms businesses, with a focus on sustaining and maintaining such systems. These legacy systems operate with minimal or no vendor support, contain hardware and software that we are not able to update and are difficult to maintain, yet any interruption caused by a failure or breach of these systems could create disruption in the core businesses that generate a declining portion of our revenue. In addition, our technology, infrastructure and processes may contain undetected errors or design faults that may cause our websites or operating systems to fail. Over the past two years, we shifted a substantial portion of our applications to a private cloud-based environment. While we maintain redundant systems and backup databases and applications software to ensure continuous access to cloud services, it is possible that access to our software capabilities could be interrupted and our disaster recovery planning may not account for all eventualities. The failure of our systems could interfere with the delivery of products and services to our customers, impede our customers' ability to do business and result in the loss or corruption of critical data. In addition to the potential loss of customers, we may be required to incur additional development costs and divert technical and other resources, and we may be the subject of negative publicity and/or liability claims, all of which would adversely affect our reputation and operating results.
In addition, our continued development and implementation of new generation software solutions and information technology infrastructure may take longer than originally expected and require the acquisition of additional personnel and other resources, which may adversely affect our business, results of operations and financial condition. Any inability to deploy new generation information technology throughout our organization would result in our operating multiple platforms, which would increase costs.
We face uncertainty regarding the success of recent and future acquisitions, which could have an adverse impact on our operating results.
We have acquired over 25 companies in the last 3 years, the details of which appear under the caption “Note 5: Acquisitions” of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. We have invested in acquisitions that offer marketing solutions and other services and that extend the range of products and services we offer to financial institutions and small businesses, including treasury management and data-driven marketing solutions. In addition, over the past several years, we have purchased the operations of many small business distributors with the intention of growing revenue in our major accounts and dealer channels. The integration of any acquisition involves numerous risks, including, among others:
• |
difficulties and/or delays in assimilating operations, products and services, including effectively scaling revenue and ensuring a strong system of information security and controls is in place; |
• |
failure to realize expected synergies and savings or to achieve projected profitability levels on a sustained basis; |
• |
diversion of management's attention from other business concerns and risks of managing an increasingly diverse set of products and services across expanded and new industries; |
• |
unanticipated integration costs; |
• |
difficulty in maintaining controls, procedures and policies, especially when the acquired business was a non-public company and may not have employed the same rigor in these areas as required for a publicly traded company; |
• |
decisions by our customers or the customers of the acquired business to temporarily or permanently seek alternate suppliers; |
• |
difficulty in assimilating the acquired business into our corporate culture; |
• |
failure to address legacy distributor account protection rights; |
• |
unidentified issues not discovered during our due diligence process, including product or service quality issues, intellectual property issues and tax or legal contingencies; and |
• |
loss of key employees. |
One or more of these factors could impact our ability to successfully operate, integrate or leverage an acquisition and could negatively affect our results of operations.
We expect to continue to invest in acquisitions. The time and expense associated with finding suitable businesses, technologies or services to acquire can be disruptive to our ongoing business and may divert management’s attention. We
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cannot predict whether suitable acquisition candidates can be acquired on acceptable terms or whether any acquired products, technologies or businesses will contribute to our revenue or earnings to any material extent. We may need to seek financing for larger acquisitions, which would increase our debt obligations and may not be available on terms that are favorable to us. Additionally, significant acquisitions typically result in additional contingent liabilities and/or additional amortization expense related to acquired intangible assets, and thus, could adversely affect our business, results of operations and financial condition.
We may not succeed in promoting and strengthening our brand, which could prevent us from acquiring customers and increasing revenue.
The success of our businesses depends, in part, on our ability to attract new and repeat customers. For this reason, a component of our business strategy is the promotion and strengthening of the Deluxe brand. We believe that the importance of brand recognition is essential for the success of our service offerings because of the level of competition for these services. Customer awareness of our brand, as well as the perceived value of our brand, will depend largely on the success of our marketing efforts and our ability to provide a consistent, high quality customer experience. To promote our brand, we have incurred, and will continue to incur, expense related to advertising and other marketing efforts. We can provide no assurance that these efforts will be successful or that our revenue will increase at a level commensurate with our marketing expenditures. There is also the risk that negative information about Deluxe, even if based on rumor or misunderstanding, could adversely affect our business. In early 2018, we entered into a partnership with television personality Ty Pennington, who will appear in our online series, Small Business Revolution – Main Street. Previously, we had a partnership with Robert Herjavec of the television show Shark Tank, and his episodes of the Small Business Revolution series remain available online. If our business partners are the subject of adverse news reports or negative publicity, such events could reduce the effectiveness of our partnerships, which in turn, could adversely affect our business and results of operations.
A component of our brand promotion strategy is establishing a relationship of trust with our customers, which we believe can be achieved by providing a high-quality customer experience. We have invested, and will continue to invest, resources in website development, design and technology, and customer service and production operations. Our ability to provide a high-quality customer experience is also dependent on external factors including the reliability and performance of our suppliers, telecommunications providers and third-party carriers. If we are unable to provide a high-quality customer experience for any reason, our reputation may be harmed and our efforts to develop brand loyalty could be adversely impacted. The failure of our brand promotion activities to meet our expectations could adversely affect our ability to attract new customers and maintain customer relationships, adversely harming our business and results of operations.
If we do not adapt to changes in technology in a timely and cost-effective manner, our ability to sustain and grow our business could be adversely affected.
Changes in the nature of technology solutions used by small businesses and their customers may occur rapidly. In addition, the markets for many of the services provided by our Financial Services segment are characterized by constant technological changes. The introduction of competing products and services using new technologies, the evolution of industry standards or the introduction of more attractive products or services could make some or all of our products and services less desirable, or even obsolete. These potential changes are magnified by the intense competition we face. To be successful, our technology-based products and services must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. We could lose current and potential customers if we are unable to develop products and services that meet these changing demands in a timely manner. Additionally, our operating results could be adversely affected if we are required to incur substantial costs to keep pace with technological advances.
If third-party providers of certain significant information technology needs are unable to provide services, our business could be disrupted and the cost of such services could increase.
We have entered into agreements with third-party providers for information technology services, including telecommunications, network server, cloud computing and transaction processing services. In addition, we have agreements with companies to provide services such as online payment solutions. A service provider's ability to provide services could be disrupted for a variety of reasons, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, or other conditions. In the event that one or more of our service providers is unable to provide adequate or timely information technology services, our ability to deliver products and services to our customers could be adversely affected. Although we believe we have taken reasonable steps to protect our business through contractual arrangements with our service providers, we cannot completely eliminate the risk of disruption in service. Any significant disruption could harm our business, including damage to our brand and loss of customers. Additionally, although we believe that information technology services are available from numerous sources, a failure to perform by one or more of our service providers could cause a material disruption in our business while we obtain an alternative source of supply. The use of substitute third-party providers could also result in increased expense.
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Asset impairment charges would have a negative impact on our consolidated results of operations.
Goodwill and an indefinite-lived trade name represented 52% of our total assets as of December 31, 2017. On at least an annual basis, we assess whether the carrying value of these assets is impaired. This analysis considers factors including, but not limited to, economic, market and industry conditions. Circumstances that could indicate a decline in the fair value of one or more of our reporting units include, but are not limited to, the following:
• |
a decline in our stock price for a sustained period; |
• |
a downturn in economic conditions that negatively affects our actual and forecasted operating results; |
• |
a material acceleration of order volume declines for our Direct Checks segment; |
• |
the failure of recent acquisitions to achieve expected operating results; or |
• |
changes in our business strategies. |
Such situations may require us to record an impairment charge for a portion of goodwill and/or our indefinite-lived trade name. For example, during 2017, we recorded a goodwill impairment charge of $28.4 million related to our Small Business Services Safeguard reporting unit. The impairment analysis of this reporting unit, which incorporated the results of the annual strategic planning process, indicated lowered projected long-term revenue growth and profitability levels resulting from changes in market trends and the mix of products and services sold, including the continuing decline in checks and forms. We are also required to assess the carrying value of other long-lived assets, including amortizable intangibles and assets held for sale. If we were required to record additional asset impairment charges for any reason, our consolidated results of operations would be adversely affected.
Our variable-rate indebtedness exposes us to interest rate risk and our credit facility matures in February 2019.
Borrowings under our credit facility are subject to variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our interest expense would increase, negatively affecting earnings and reducing cash flows available for working capital, capital expenditures and acquisitions.
Our credit facility matures in February 2019. As such, we will need to repay, refinance, replace or otherwise extend the maturity of our credit facility. Our ability to do so will be dependent on, among other things, business conditions, our financial performance and the general condition of the financial markets. If a financial disruption were to occur at the time that we are required to repay, refinance or replace indebtedness outstanding under our credit facility, we could be forced to undertake alternate financings under current market terms, negotiate for an extension of the maturity of the credit facility or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay our indebtedness. We can provide no assurance that the terms of any new debt agreements will be as favorable as those under our current credit facility, which would negatively affect our results of operations and cash flow.
Governmental regulation is continuously evolving and could limit or harm our business.
We are subject to numerous international, federal, state and local laws and regulations that affect our business activities in areas including, but not limited to, labor, advertising, taxation, data privacy and security, digital content, consumer reports, consumer protection, online payment services, real estate, e-commerce, intellectual property, health care, environmental matters, and workplace health and safety. The cost of complying with these laws and regulations is significant. In addition, regulators may adopt new laws or regulations at any time, including triggering enforcement actions, or their interpretation of existing laws may change and/or differ from ours. These various regulatory requirements could impose significant limitations on our business activities, require changes to our business, restrict our use or storage of personal information, or cause changes in our customers' purchasing behavior which may make our business more costly and/or less efficient and may require us to modify our current or future products, services, systems or processes. We cannot quantify or predict with any certainty the likely impact of such changes on our business, prospects, financial condition or results of operations.
Portions of our business operate within highly regulated industries and our business results could be significantly affected by the laws and regulations to which we are subject. For example, federal, state and international laws and regulations regarding the protection of certain consumer information require us to develop, implement and maintain policies and procedures to protect the security and confidentiality of consumers' nonpublic personal information. Portions of our business are subject to regulations affecting payment processing, including ACH, remote deposit capture, and lockbox services. These laws and regulations require us to develop, implement, and maintain certain policies and procedures related to payment processing. We are also subject to additional requirements in certain of our contracts with financial institution clients and communications service providers, which are often more restrictive than the regulations, as well as confidentiality clauses in certain of our contracts related to small businesses’ customer information. These regulations and agreements typically limit our ability to use or disclose nonpublic personal information for other than the purposes originally intended, which could limit business opportunities. Proposed cyber security regulations may also increase the cost of compliance for the protection of nonpublic personal information. The complexity of compliance with these various regulations may increase our cost of doing business and may affect our financial institution clients, reducing their discretionary spending and thus, reducing their capacity to purchase our products and services.
17
Due to our increasing use of the internet for sales and marketing, laws specifically governing digital commerce, the internet, mobile applications, search engine optimization, behavioral advertising and email marketing may have an impact on our business. Existing and future laws governing issues such as net neutrality, digital and social marketing, privacy, consumer protection or commercial email may limit our ability to market and provide our products and services. Changing data protection regulations may increase the cost of compliance in servicing international markets for our wholesale and retail business services channels. More restrictive legislation, such as new privacy laws, search engine marketing restrictions, “anti-spam” regulations, or email privacy rules, could decrease marketing opportunities, decrease traffic to our websites, and/or increase the cost of obtaining new customers.
Because of additional regulatory costs, financial institutions may put significant pricing pressure on their suppliers, including their check and service providers. The increase in cost and profit pressure may also lead to further consolidation of financial institutions. Additionally, some financial institutions are wary of offering add-on services, such as bundled products, fraud/identity protection, expedited check delivery or rewards programs, to their customers. It would have an adverse impact on our results of operations if we were unable to market such services to consumers or small businesses through our financial institution clients. Additionally, as our product and service offerings become more technologically focused, and with expanded regulatory expectations for supervision of third-party service providers, additional portions of our business could become subject to direct federal regulation and/or examination. This would increase our cost of doing business and could slow our ability to introduce new products and services and otherwise adapt to a rapidly changing business environment.
We are subject to environmental risks which, if realized, could have an adverse impact on our operating results. Our printing facilities are subject to many federal, state and local regulations designed to protect the environment, including those related to air emissions, wastewater discharge, waste disposal, and remediation of contaminated sites. We have sold former printing facilities to third parties and, in some instances, have agreed to indemnify the buyer of the facility for certain environmental liabilities. Unforeseen conditions at current or former facilities could result in additional liability and expense beyond our insurance coverage.
Sales and other tax collection requirements could have an adverse effect on our business. We currently collect sales, use and similar taxes in jurisdictions where our legal entities have a physical presence, in accordance with landmark decisions of the United States Supreme Court. States and local jurisdictions have begun enacting legislation requiring collection beyond our current practices. This potential increased cost to our customers may discourage them from purchasing our products and services, which would have an adverse effect on our business. Furthermore, if one or more state or local jurisdictions successfully asserts that we should have collected sales or other taxes in the past, but did not, we could incur a substantial liability for uncollected taxes. In addition, federal and state income tax laws and regulations are subject to change and could impact our consolidated results of operations and financial position. Federal tax reform legislation, which was enacted in December 2017 as the Tax Cuts and Jobs Act (the 2017 Act), resulted in a reduction in our 2017 income tax expense of approximately $20.5 million. We expect that our annual effective income tax rate for 2018 will be approximately 25% and we expect that our total tax payments in 2018 will be approximately $25.0 million less than in 2017, driven primarily by the 2017 Act.
Economic conditions could have an adverse effect on operating results in each of our business segments.
Economic conditions have affected, and will continue to affect, our results of operations and financial position. Current and future economic conditions that affect consumer and business spending, including unemployment levels, the availability of credit, and small business confidence, as well as the financial condition and growth prospects of our customers, may adversely affect our business and results of operations.
A significant portion of our business relies on small business spending. As such, the level of small business confidence and the rate of small business formations and closures impact our business. We believe small businesses are more likely to be significantly affected by economic downturns than larger, more established companies. During a sluggish economy, it may be more difficult for small businesses to obtain credit and small businesses may choose to spend their limited funds on items other than our products and services. The National Federation of Independent Business (NFIB) publishes the results of monthly surveys that provide an indication of small business owners' view of economic conditions. The index of small business optimism published by the NFIB in December 2017 was 104.9, down slightly from 105.8 in December 2016. For 2017, the average index was 104.8, up significantly from the 96.3 average in 2016. At the same time, the net percent of small business owners expecting general business conditions to be better in 6 months declined to 37% in December 2017, as compared to 50% in December 2016. Although there continues to be some optimism from small business owners, including some belief that they will benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017, we cannot predict whether sustainable positive trends will translate into economic growth. Within our personal check printing businesses, consumer spending, employment levels, and housing stock and starts impact the number of checks consumers use. We estimate that the 2017 growth rates for consumer spending and private sector employment most likely had a neutral impact on our personal check businesses. An increase in housing stock and starts has a positive impact on the number of checks purchased, as new households typically are in need of new checks. According to statistics released by the United States Census Bureau in January 2018, housing units completed during 2017 increased almost 9% as compared to 2016. We cannot predict whether these economic trends will improve, stay the same or worsen in the near future.
18
As a result of global economic conditions in recent years, a number of financial institutions sought additional capital, merged with other financial institutions and, in some cases, failed. This turmoil in the financial services industry affected and may continue to affect our results of operations. The failure of one or more of our larger financial institution clients, or large portions of our customer base, could adversely affect our operating results. In addition to the possibility of losing a significant client, the inability to recover contract acquisition payments made to one or more of our larger financial institution clients, or the inability to collect accounts receivable or contractually required contract termination payments, could have a significant negative impact on our results of operations. There may also be an increase in financial institution mergers and acquisitions during periods of economic uncertainty. Such an increase could adversely affect our operating results. Often the newly combined entity seeks to reduce costs by leveraging economies of scale in purchasing, including its check supply and business services contracts. This results in providers competing intensely on price in order to retain not only their previous business with one of the financial institutions, but also to gain the business of the other party in the merger/acquisition. In addition, we are focused on targeting our FinTech solutions to larger financial institutions. The resulting customer concentration could increase our sensitivity to any material, adverse developments affecting our significant customers, including adverse economic conditions. Although we devote considerable effort toward the development of a competitively-priced, high-quality selection of products and services for the financial services industry, there can be no assurance that significant financial institution clients will be retained or that the impact of the loss of a significant client can be offset through the addition of new clients or by expanded sales to our remaining clients.
A deterioration in financial markets and/or in general business conditions in 2018 would negatively affect our operating results.
If we are unable to attract and retain key personnel and other qualified employees, our business could suffer.
The success of our business depends on the contributions and abilities of key employees, especially in our digital services businesses and specifically in sales, marketing, product management, data analytics and information technology. If we are unable to retain our existing employees and/or attract qualified personnel, we may not be able to grow and manage our business effectively. We can provide no assurance that we will be successful in attracting and retaining such personnel.
The cost and availability of materials, delivery services and energy could adversely affect our operating results.
We are subject to risks associated with the cost and availability of paper, plastics, ink, retail packaging supplies, promotional materials, other raw materials, delivery services and energy. Paper costs represent a significant portion of our materials cost. Paper is a commodity and its price has been subject to volatility due to supply and demand in the marketplace, as well as volatility in the raw material and other costs incurred by our paper suppliers. There are also relatively few paper suppliers and these suppliers are under financial pressure as paper use declines. As such, when our suppliers increase paper prices, we may not be able to obtain better pricing from alternative suppliers. Historically, we have not been negatively impacted by paper shortages because of our relationships with paper suppliers. However, we can provide no assurance that we will be able to purchase sufficient quantities of paper if such a shortage were to occur.
We depend upon third-party providers for delivery services and for outsourced products and services. Events resulting in the inability of these service providers to perform their obligations, such as work slowdowns or extended labor strikes, could adversely impact our results of operations by requiring us to secure alternate providers at higher costs. Postal rates are dependent on the operating efficiency of the United States Postal Service (USPS) and on legislative mandates imposed upon the USPS. Postal rates have increased in recent years and the USPS has incurred significant financial losses. This may result in changes to the breadth and/or frequency of USPS mail delivery services in the future. In addition, fuel costs have fluctuated over the past several years. Increased fuel costs can increase the costs we incur to deliver products to our customers, as well as the price we pay for outsourced products and services. Competitive pressures and/or contractual arrangements may inhibit our ability to reflect increased costs in the price of our products.
The failure to reduce costs could have an adverse impact on our operating results.
Intense competition, declines in the use of checks and business forms, the commoditization of web services, and sluggish economic conditions compel us to continually improve our operating efficiency in order to maintain or improve profitability. We have significantly reduced costs over the past several years, primarily within sales, marketing, service fulfillment and operational support, as well as our shared services functions, including product fulfillment, information technology, real estate, finance and human resources. We realized net cost reductions of approximately $45.0 million in 2017, as compared to our 2016 results of operations, and we will continue to explore ways to simplify our business processes and reduce our cost and expense structure. Cost reduction initiatives have required and will continue to require up-front expenditures related to items such as redesigning and streamlining processes, consolidating information technology platforms, standardizing technology applications, further enhancing our strategic supplier sourcing arrangements, improving real estate utilization and funding employee severance benefits. We can provide no assurance that we will achieve future cost reductions or that we will do so without incurring unexpected or greater than anticipated expenditures. Moreover, we may find that we are unable to achieve business simplification and/or cost reduction goals without disrupting our business and, as a result, may choose to delay or forgo certain cost reductions as business conditions require. Failure to continue to improve our operating efficiency could adversely affect our business if we are unable to remain competitive.
19
We could lose access to data sources which could harm our ability to provide certain of our products and services.
We rely upon data from external sources to maintain our proprietary and non-proprietary databases, including data received from customers, strategic partners and various government and public record sources. This data includes credit and non-credit data from the national credit bureaus and other data brokers. Although we have not experienced material issues in this regard, our data sources could stop providing data, they could provide untimely data, or they could fail to adhere to our quality control standards, causing us to incur additional expense to appropriately utilize the data. In addition, our data sources could increase the costs of their data for a variety of reasons, including legislatively or judicially imposed restrictions on use, a perception that our systems are insecure, or for competitive reasons.
If a substantial number of data sources or certain key data sources were to withdraw their services, if we were to lose access to data due to government regulation, if we were to lose exclusive right to the use of data, or if the collection of data were to become uneconomical, our ability to provide our products and services could be negatively impacted. We can provide no assurance that we would be able to identify and contract with suitable alternative data suppliers and integrate these data sources into our product and service offerings.
Third-party claims could result in costly and distracting litigation, and in the event of an unfavorable outcome, could have an adverse effect on our business, financial condition and results of operations.
From time to time, we are involved in claims, litigation and other proceedings relating to the conduct of our business, including purported class action litigation. Such legal proceedings may include claims related to our employment practices; claims alleging breach of contractual obligations; claims asserting deceptive, unfair or illegal business practices; or claims alleging violations of consumer protection-oriented laws. In addition, third parties may assert patent and other intellectual property infringement claims against us and/or our clients, which could include aggressive and opportunistic enforcement of patents by non-practicing entities. Any such claims could result in litigation against us and could also result in proceedings being brought against us by various federal and state agencies that regulate our business. The number and significance of these claims and proceedings has increased as our businesses have evolved and expanded in scope. These claims, whether successful or not, could divert management's attention, result in costly and time-consuming litigation, or both. Accruals for identified claims or lawsuits are established based on our best estimates of our probable liability. However, we cannot accurately predict the ultimate outcome of any such proceedings due to the inherent uncertainties of litigation and other dispute resolution mechanisms. Any unfavorable outcome of a material claim or material litigation could result in a material adverse effect on our business, financial condition and results of operations.
We are subject to customer payment-related risks, which could adversely affect our business and financial results.
We accept payments for our products and services on our websites by a variety of methods, including credit and debit cards, checks and wire transfers. For debit and credit cards, we pay interchange and other fees that may increase over time. We are also subject to payment card association operating rules and requirements, including Payment Card Industry Data Security Standards, a set of security standards designed to ensure that all companies that accept, process, store or transmit credit card information maintain a secure environment. These rules and requirements have changed over time and could change in the future or be reinterpreted to make it more costly, more difficult or impossible for us to comply. If we fail to comply with these rules and requirements, we may be subject to fines and/or higher transaction fees. Any changes could increase our cost of compliance, which would negatively affect our financial results. We could also lose our ability to accept credit and debit card payments from our customers, which would likely result in the loss of customers and the inability to attract new customers.
In addition, we may be liable for fraudulent transactions conducted on our websites, such as the use of stolen credit card numbers. While we do have safeguards in place, we cannot prevent all fraudulent transactions. To date, we have not incurred significant losses from payment-related fraud. However, such transactions negatively impact our results of operations and could subject us to penalties from payment card associations for inadequate fraud protection.
We may be unable to protect our rights in intellectual property, which could harm our business and ability to compete.
We rely on a combination of trademark and copyright laws, trade secret and patent protection, and confidentiality and license agreements to protect our trademarks, software and other intellectual property. These protective measures afford only limited protection. Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property or otherwise independently develop substantially equivalent products or services that do not infringe on our intellectual property rights. Policing unauthorized use of our intellectual property is difficult. We may be required to spend significant resources to protect our trade secrets and to monitor and police our intellectual property rights. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm our business and ability to compete.
20
A decline in the value of our postretirement medical plan assets and/or a significant increase in the number of participants in our postretirement medical plan could adversely affect our operating results and cash flows.
The fair value of our postretirement medical plan assets is subject to various risks, including credit, interest and overall market volatility risk. If the equity markets were to experience a significant decline in value, the fair value of our plan assets would decrease. This would affect the funded status of our plan and result in higher postretirement benefit expense in the future. Although our obligation is limited to funding benefits as they become payable, future declines in the fair value of our plan assets could also result in the need to contribute increased amounts of cash to fund benefits payable under the plan.
The number of participants in our postretirement medical plan could increase significantly. For the 2018 plan year, 43.8% of those eligible to participate in our postretirement medical plan have elected not to participate. If a significant portion of those not participating were to opt-in to our plan, our benefit obligation would increase, which would result in increased expense. Although our plan is currently overfunded, a significant increase in plan participants could also require us to contribute increased amounts of cash to fund benefits payable under the plan.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive office is an owned property located in Shoreview, Minnesota. As of December 31, 2017, we occupied 65 facilities throughout the United States, 7 facilities in Canada, 2 facilities in Europe and a facility in Australia where we conduct printing and fulfillment, call center, data center and administrative functions. Approximately 20% of our facilities are owned, while the remaining 80% are leased. These facilities have a combined floor space of approximately 3.0 million square feet. We believe that our properties are sufficiently maintained and are adequate and suitable for our business needs as presently conducted.
Item 3. Legal Proceedings.
We record provisions with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable outcomes. Recorded liabilities were not material to our financial position, results of operations or liquidity, and we do not believe that any of the currently identified claims or litigation will materially affect our financial position, results of operations or liquidity upon resolution. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on our financial position, results of operations or liquidity in the period in which the ruling occurs or future periods.
Item 4. Mine Safety Disclosures.
Not applicable.
21
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the New York Stock Exchange under the symbol DLX. Dividends are declared by our board of directors on a current basis, and therefore, are subject to change in the future. As of December 31, 2017, the number of shareholders of record was 6,491. The table below shows the per share price ranges of our common stock for the past two fiscal years as quoted on the New York Stock Exchange, as well as the quarterly dividend amount for each period.
Stock price |
||||||||||||||||
Dividend |
High |
Low |
Close |
|||||||||||||
2017 |
||||||||||||||||
Quarter 4 |
$ |
0.30 |
$ |
77.36 |
$ |
66.98 |
$ |
76.84 |
||||||||
Quarter 3 |
0.30 |
74.60 |
67.01 |
72.96 |
||||||||||||
Quarter 2 |
0.30 |
74.13 |
66.43 |
69.22 |
||||||||||||
Quarter 1 |
0.30 |
75.94 |
69.93 |
72.17 |
||||||||||||
2016 |
||||||||||||||||
Quarter 4 |
$ |
0.30 |
$ |
73.42 |
$ |
59.47 |
$ |
71.61 |
||||||||
Quarter 3 |
0.30 |
70.26 |
64.78 |
66.82 |
||||||||||||
Quarter 2 |
0.30 |
67.81 |
59.83 |
66.37 |
||||||||||||
Quarter 1 |
0.30 |
62.77 |
49.46 |
62.49 |
||||||||||||
The following table shows purchases of our own equity securities, based on trade date, which were completed during the fourth quarter of 2017:
Period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum approximate dollar value of shares that may yet be purchased under the plans or programs |
||||||||||
|
October 1, 2017 -
October 31, 2017
|
14,400 |
$ |
69.37 |
14,400 |
$ |
253,657,577 |
||||||||
|
November 1, 2017 -
November 30, 2017
|
170,300 |
68.89 |
170,300 |
241,926,212 |
||||||||||
|
December 1, 2017 -
December 31, 2017
|
30,716 |
71.62 |
30,716 |
239,726,484 |
||||||||||
Total |
215,416 |
69.31 |
215,416 |
239,726,484 |
||||||||||
In May 2016, our board of directors approved an authorization for the repurchase of up to $300.0 million of our common stock, effective at the conclusion of a previous authorization. This authorization has no expiration date and $239.7 million remained available for purchase as of December 31, 2017.
While not considered repurchases of shares, we do at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as a result of the exercise or vesting of such awards. During the fourth quarter of 2017, we withheld 36,154 shares in conjunction with the vesting and exercise of equity-based awards.
There are currently no limitations on the amount of dividends and share repurchases under the terms of our credit agreement. However, if our leverage ratio, defined as total debt less unrestricted cash to earnings before interest, taxes, depreciation and amortization (EBITDA), should exceed 2.75 to 1, there would be an annual limitation on the amount of dividends and share repurchases under the terms of this agreement.
22
The table below compares the cumulative total shareholder return on our common stock for the last five fiscal years with the cumulative total return of the S&P MidCap 400 Index and the Dow Jones U.S. Support Services (DJUSIS) Index.
Comparison of Five-Year Cumulative Total Return
Assumes Initial Investment of $100
December 2017
The graph assumes that $100 was invested on December 31, 2012 in each of Deluxe common stock, the S&P MidCap 400 Index and the DJUSIS Index, and that all dividends were reinvested.
23
Item 6. Selected Financial Data.
The following table shows certain selected financial data for the five years ended December 31, 2017. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 of this report and our consolidated financial statements appearing in Item 8 of this report. These items include discussion of various factors that affect the comparability of the selected financial data, including the Tax Cuts and Jobs Act of 2017, asset impairment charges and business acquisitions. Historical results are not necessarily indicative of future results.
(dollars and orders in thousands, except per share and per order amounts) |
2017 |
2016 |
2015 |
2014 |
2013 |
|||||||||||||||
Statement of Income Data: |
||||||||||||||||||||
Total revenue |
$ |
1,965,556 |
$ |
1,849,062 |
$ |
1,772,817 |
$ |
1,674,082 |
$ |
1,584,824 |
||||||||||
As a percentage of total revenue: |
||||||||||||||||||||
Gross profit |
62.2 |
% |
63.9 |
% |
63.9 |
% |
63.8 |
% |
64.6 |
% |
||||||||||
Selling, general and administrative expense |
42.2 |
% |
43.6 |
% |
43.7 |
% |
43.0 |
% |
43.6 |
% |
||||||||||
Operating income |
16.8 |
% |
19.9 |
% |
20.0 |
% |
19.9 |
% |
20.1 |
% |
||||||||||
Operating income |
$ |
331,192 |
$ |
368,727 |
$ |
354,331 |
$ |
332,633 |
$ |
317,914 |
||||||||||
Net income: |
230,155 |
229,382 |
218,629 |
199,794 |
186,652 |
|||||||||||||||
Per share - basic |
4.75 |
4.68 |
4.39 |
3.99 |
3.68 |
|||||||||||||||
Per share - diluted |
4.72 |
4.65 |
4.36 |
3.96 |
3.65 |
|||||||||||||||
Cash dividends per share |
1.20 |
1.20 |
1.20 |
1.15 |
1.00 |
|||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ |
59,240 |
$ |
76,574 |
$ |
62,427 |
$ |
61,541 |
$ |
121,089 |
||||||||||
Return on average assets(1)
|
10.5 |
% |
11.4 |
% |
12.4 |
% |
12.3 |
% |
12.6 |
% |
||||||||||
Total assets |
$ |
2,208,827 |
$ |
2,184,338 |
$ |
1,842,153 |
$ |
1,683,682 |
$ |
1,563,887 |
||||||||||
Long-term obligations(2)
|
709,300 |
758,648 |
629,018 |
549,603 |
635,062 |
|||||||||||||||
Statement of Cash Flows Data: |
||||||||||||||||||||
Net cash provided by operating activities |
$ |
338,431 |
$ |
319,312 |
$ |
309,631 |
$ |
285,098 |
$ |
263,729 |
||||||||||
Net cash used by investing activities |
(180,891 |
) |
(310,786 |
) |
(251,140 |
) |
(136,043 |
) |
(101,050 |
) |
||||||||||
Net cash (used) provided by financing activities |
(176,949 |
) |
4,275 |
(48,387 |
) |
(204,048 |
) |
(84,524 |
) |
|||||||||||
Purchases of capital assets |
(47,450 |
) |
(46,614 |
) |
(43,261 |
) |
(41,119 |
) |
(37,459 |
) |
||||||||||
Payments for acquisitions, net of cash acquired |
(139,223 |
) |
(270,939 |
) |
(212,990 |
) |
(105,029 |
) |
(69,709 |
) |
||||||||||
Payments for common shares repurchased |
(65,000 |
) |
(55,224 |
) |
(59,952 |
) |
(60,119 |
) |
(48,798 |
) |
||||||||||
Other Data: |
||||||||||||||||||||
Orders(3)
|
49,981 |
52,176 |
53,138 |
52,632 |
52,584 |
|||||||||||||||
Revenue per order(3)
|
$ |
39.33 |
$ |
35.44 |
$ |
33.36 |
$ |
31.81 |
$ |
30.14 |
||||||||||
Number of employees |
5,886 |
6,026 |
5,874 |
5,830 |
5,575 |
|||||||||||||||
Number of printing facilities(4)
|
11 |
12 |
11 |
11 |
12 |
|||||||||||||||
Number of call center facilities(4)
|
26 |
26 |
14 |
16 |
16 |
|||||||||||||||
(1) Return on average assets is calculated as net income divided by average assets for the period.
(2) Long-term obligations includes the current and long-term portions of our debt obligations, including capital leases. We had no short-term borrowings outstanding as of December 31 for any of the periods presented. As such, these amounts also represent our total debt obligations.
(3) Orders is our company-wide measure of volume and includes both products and services.
(4) As of December 31, 2017, we had 2 facilities that contain both printing and call center functions and thus, are included in both captions. We had 40 additional facilities which house small customer fulfillment operations and general office space. This information excludes facilities associated with businesses held for sale as of each date. Further information regarding assets held for sale can be found under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:
• |
Executive Overview that discusses what we do, our operating results at a high level and our financial outlook for the upcoming year. |
• |
Consolidated Results of Operations, Restructuring Costs and Segment Results that includes a more detailed discussion of our revenue and expenses. |
• |
Cash Flows and Liquidity, Capital Resources and Other Financial Position Information that discusses key aspects of our cash flows, capital structure and financial position. |
• |
Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations that discusses our financial commitments. |
• |
Critical Accounting Policies that discusses the policies we believe are important to understanding the assumptions and judgments underlying our financial statements. |
You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see Item 1A of this report for important information to consider when evaluating our forward-looking statements. The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information. We are filing this cautionary statement in connection with the Reform Act. When we use the words or phrases “should result,” “believe,” “intend,” “plan,” “are expected to,” “targeted,” “will continue,” “will approximate,” “is anticipated,” “estimate,” “project,” “outlook,” "forecast" or similar expressions in this Annual Report on Form 10-K, in future filings with the Securities and Exchange Commission, in our press releases, investor presentations and in oral statements made by our representatives, they indicate forward-looking statements within the meaning of the Reform Act.
EXECUTIVE OVERVIEW
We provide solutions that help our customers acquire and engage their customers across multiple channels, as well as operate their businesses efficiently and effectively. To promote and sell a wide range of products and services, we use printed and electronic marketing; a direct sales force; referrals from financial institutions, telecommunication clients and other partners; networks of Safeguard® distributors and independent dealers; and an outbound telemarketing group. Over the past 24 months, our Small Business Services segment has provided products and services to approximately 4.4 million small business customers and our Direct Checks segment has provided products and services to more than 5.1 million consumers. Through our Financial Services segment, we provide products and services to approximately 4,900 financial institution clients. We operate primarily in the United States. Small Business Services also has operations in Canada, Australia and portions of Europe.
Our product and service offerings are comprised of the following:
Checks – We remain one of the largest providers of checks in the United States. During 2017, checks represented 39% of our Small Business Services segment's revenue, 43% of our Financial Services segment's revenue and 84% of our Direct Checks segment's revenue.
Marketing solutions and other services (MOS) – We offer products and services designed to meet our customers’ sales and marketing needs, as well as various other service offerings. Our marketing products include digital printing and web-to-print solutions such as business cards, print marketing, promotional goods and apparel. Our web services offerings include logo design; hosting, domain name and web design services; search engine optimization; and marketing programs, including email, mobile and social media. We also offer fraud protection and security services, online and offline payroll services, and electronic checks ("eChecks"). Our Financial Services segment also offers a selection of financial technology ("FinTech") solutions. These solutions include data-driven marketing solutions, including outsourced marketing campaign targeting and execution; treasury management solutions, including accounts receivable processing and remote deposit capture; and digital engagement solutions, including loyalty and rewards programs. During 2017, MOS represented 34% of our Small Business Services segment's revenue, 55% of our Financial Services segment's revenue and 11% of our Direct Checks segment's revenue.
Forms – Our Small Business Services segment is a leading provider of printed forms to small businesses, including deposit tickets, billing forms, work orders, job proposals, purchase orders, invoices and personnel forms. This segment also offers computer forms compatible with accounting software packages commonly used by small businesses. Forms sold by our Financial Services and Direct Checks segments include deposit tickets and check registers.
Accessories and other products – Small Business Services offers products designed to provide small business owners with the customized documents necessary to efficiently manage their business including envelopes, office supplies, ink stamps and labels. Our Financial Services and Direct Checks segments offer checkbook covers, labels and ink stamps.
Throughout the past several years, we have focused on opportunities to increase revenue and operating income despite the continuing decline in check and forms usage. These opportunities have included new product and service offerings, brand awareness and positioning initiatives, investing in technology for our service offerings, enhancing our information technology
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capabilities and infrastructure, improving customer segmentation, extending the reach of our sales channel, and reducing costs. In addition, we invested in various acquisitions that extend the range of products and services we offer to our customers, primarily MOS offerings. Information about our acquisitions can be found under the caption "Note 5: Acquisitions" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. During 2018, we plan to continue our focus in these areas, with an emphasis on profitable revenue growth and increasing the mix of MOS revenue, primarily data-driven marketing, treasury management and web services. We also plan to assess acquisitions that complement our large customer bases, with a focus on MOS offerings. We believe we have reached a turning point where revenue from our MOS offerings will grow at a faster rate going forward, augmented by acquisitions. MOS revenue was 40.0% of consolidated revenue in the fourth quarter of 2017. A more detailed discussion of our business strategies can be found under the caption "Business Segments" appearing in Item 1 of this report.
Earnings for 2017, as compared to 2016, increased due to price increases, a $20.5 million benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017, continuing initiatives to reduce our cost structure, primarily within our sales, marketing and fulfillment organizations, and aggregate gains of $8.7 million from the sale of businesses within Small Business Services. These increases in earnings were partially offset by pre-tax asset impairment charges of $54.9 million in 2017, volume reductions for personal and business checks due primarily to the continuing decline in check and forms usage, increased incentive compensation expense and higher material and delivery rates in 2017.
Business Challenges/Market Risks
Our business, consolidated results of operations, financial condition and cash flows could be adversely affected by various risks and uncertainties. We have disclosed all known material risks in Item 1A of this report, including discussion of the declining market for checks and business forms, competition, factors affecting our financial institution clients, data security risks, risks related to acquisitions, the impact of economic conditions and the ability to attract and retain key employees. All of these factors could cause our actual results to differ materially from the statements we make from time to time regarding our expected future results, including, but not limited to, forecasts regarding estimated revenue, MOS revenue, earnings per share, cash provided by operating activities and expected cost savings.
Cost Reduction Initiatives
For several years, we have been pursuing cost reduction and business simplification initiatives, including: reducing shared services infrastructure costs; streamlining our call center and fulfillment activities; eliminating system and work stream redundancies; and strengthening our ability to quickly develop new products and services and bring them to market. We have also standardized products and services and improved the sourcing of third-party goods and services. As a result of all of these efforts, we realized net cost savings of approximately $45.0 million during 2017, as compared to our 2016 results of operations, generated primarily by our sales, marketing and fulfillment organizations. Approximately 75% of these savings impacted selling, general and administrative (SG&A) expense, with the remaining 25% affecting total cost of revenue. We anticipate that we will realize additional net cost reductions of approximately $50.0 million in 2018, as compared to our 2017 results of operations, which will also be generated primarily by our sales, marketing and fulfillment organizations. In sales and marketing, we plan to focus on sales channel optimization, platform and tool consolidation, and leveraging sales and marketing efficiencies, including integrating recent acquisitions. In fulfillment, we expect to continue our lean initiatives, reduce direct and indirect spend, drive delivery technology and process efficiencies, and continue with other supply chain improvements and efficiencies. We also expect to better leverage our information technology platform. Approximately 75% of our 2018 savings are expected to impact SG&A expense, with the remaining 25% expected to impact total cost of revenue.
Outlook for 2018
We anticipate that consolidated revenue will be between $2.065 billion and $2.105 billion for 2018, compared to $1.966 billion for 2017. In Small Business Services, we expect revenue to increase between 4% and 5% compared to 2017 revenue of $1.240 billion. Volume declines in core business products are expected to be more than offset by growth in our online, dealer and major accounts channels, price increases, increased revenue from our MOS offerings and continued tuck-in acquisitions. In Financial Services, we expect revenue to increase between 11% and 16% compared to 2017 revenue of $585.3 million. We expect increased revenue from MOS, including data-driven marketing solutions and treasury management solutions, as well as continued acquisitions. Our outlook includes incremental revenue from the acquisition of RDM Corporation in the second quarter of 2017. We expect these revenue increases to be partially offset by year-over-year secular check order declines of approximately 7%, the expected loss of about $10.0 million in Deluxe Rewards revenue primarily due to the loss of Verizon Communications Inc. as a customer, and we expect some impact from pricing pressure in our check programs. In Direct Checks, we expect revenue to decline approximately 11% compared to 2017 revenue of $140.5 million, driven primarily by secular check order volume declines resulting from reduced check usage.
We expect that 2018 diluted earnings per share will be between $5.42 and $5.67, compared to $4.72 for 2017. Our 2018 outlook includes estimated charges of $0.13 per share for integration costs, primarily related to data-driven marketing, treasury management and web services offerings. Earnings per share for 2017 included total net charges of $0.55 per share for asset impairment charges, restructuring and integration costs and transaction costs related to acquisitions, partially offset by a benefit from federal tax reform under the Tax Cuts and Jobs Act of 2017. We expect that the benefits of additional cost reduction
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activities will be partially offset by the continuing decline in check and forms usage and continued investments in growth opportunities, particularly in talent, technology and process improvements to accelerate data-driven marketing and treasury management revenue and to drive development innovation in our treasury management infrastructure. We also expect material costs and delivery rates to increase in 2018. We estimate that our annual effective tax rate for 2018 will be approximately 25%.
We anticipate that net cash provided by operating activities will be between $360.0 million and $380.0 million in 2018, compared to $338.4 million in 2017, driven by stronger operating performance and a decrease of approximately $25.0 million in income tax payments driven primarily by the Tax Cuts and Jobs Act of 2017, partially offset by higher interest and medical payments. We anticipate contract acquisition payments of approximately $27.0 million in 2018, and we estimate that capital spending will be approximately $55.0 million in 2018 as we plan to accelerate investments in key revenue growth initiatives and order fulfillment and information technology infrastructure.
We believe that cash generated by operating activities, along with availability under our revolving credit facility, will be sufficient to support our operations in 2018, including dividend payments, capital expenditures, and required debt principal and interest payments, as well as likely acquisitions. We also believe we have access to capital markets should additional cash be necessary to fund acquisitions that exceed amounts available under our credit facility. As of December 31, 2017, $101.6 million was available for borrowing under our revolving credit facility. We expect to maintain a disciplined approach to capital deployment that focuses on our need to continue investing in initiatives to drive revenue growth, including acquisitions. We anticipate that our board of directors will maintain our current dividend level. However, dividends are approved by the board of directors on a quarterly basis, and thus are subject to change. To the extent we generate excess cash, we plan to opportunistically repurchase common shares and/or reduce the amounts outstanding under our credit facility.
As of December 31, 2017, $707.9 million was outstanding under our credit facility agreement that matures in February 2019. We plan to obtain a new multi-year credit facility to refinance the amount outstanding under the current credit facility and to satisfy those obligations. We have been successful in obtaining long-term financing with terms and in amounts adequate to meet our objectives in the past, and we expect to execute the new credit facility in the first half of 2018.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Revenue
Change |
||||||||||||||||
(in thousands, except per order amounts) |
2017 |
2016 |
2015 |
2017 vs. 2016 |
2016 vs. 2015 |
|||||||||||
Total revenue |
$ |
1,965,556 |
$ |
1,849,062 |
$ |
1,772,817 |
6.3% |
4.3% |
||||||||
Orders |
49,981 |
52,176 |
53,138 |
(4.2%) |
(1.8%) |
|||||||||||
Revenue per order |
$ |
39.33 |
$ |
35.44 |
$ |
33.36 |
11.0% |
6.2% |
||||||||
The increase in total revenue in each of the past 2 years was driven by incremental revenue from acquired businesses of approximately $173.0 million in 2017 and $114.0 million in 2016, as well as price increases in all of our segments. Information regarding our acquisitions can be found under the caption "Note 5: Acquisitions" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. These increases in revenue were partially offset by lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, revenue declined due to continued pricing allowances within Financial Services.
Service revenue represented 25.2% of total revenue in 2017, 20.3% in 2016 and 18.1% in 2015. As such, the majority of our revenue is generated by product sales. We do not manage our business based on product versus service revenue. Instead, we analyze our products and services based on the following categories:
Change |
|||||||||||||
2017 |
2016 |
2015 |
2017 vs. 2016 |
2016 vs. 2015 |
|||||||||
Checks |
43.3 |
% |
46.8 |
% |
49.3 |
% |
(3.5) pt. |
(2.5) pt. |
|||||
Marketing solutions and other services |
38.4 |
% |
33.4 |
% |
30.0 |
% |
5.0 pt. |
3.4 pt. |
|||||
Forms |
10.8 |
% |
11.6 |
% |
12.2 |
% |
(0.8) pt. |
(0.6) pt. |
|||||
Accessories and other products |
7.5 |
% |
8.2 |
% |
8.5 |
% |
(0.7) pt. |
(0.3) pt. |
|||||
Total revenue |
100.0 |
% |
100.0 |
% |
100.0 |
% |
— |
— |
|||||
The number of orders decreased in each of the past 2 years driven by the impact of the continuing decline in check and forms usage, partially offset by growth in MOS, including the impact of acquisitions. Revenue per order increased in each of the
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past 2 years primarily due to the benefit of price increases and favorable product and service mix, partially offset by the impact of continued pricing allowances in Financial Services.
Consolidated Cost of Revenue
Change |
||||||||||||||||
(in thousands) |
2017 |
2016 |
2015 |
2017 vs. 2016 |
2016 vs. 2015 |
|||||||||||
Total cost of revenue |
$ |
742,090 |
$ |
667,241 |
$ |
639,209 |
11.2% |
4.4% |
||||||||
Total cost of revenue as a percentage of total revenue |
37.8 |
% |
36.1 |
% |
36.1 |
% |
1.7 pt. |
— |
||||||||
Cost of revenue consists primarily of raw materials used to manufacture our products, shipping and handling costs, third-party costs for outsourced products and services, payroll and related expenses, information technology costs, depreciation and amortization of assets used in the production process and in support of digital service offerings, and related overhead.
The increase in total cost of revenue for 2017, as compared to 2016, was primarily attributable to the increase in revenue, including incremental costs of approximately $101.0 million for acquired businesses. In addition, delivery rates and material costs increased in 2017. Partially offsetting these increases in total cost of revenue was the impact of lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services, and favorable product mix. In addition, total cost of revenue decreased approximately $11.0 million due to manufacturing efficiencies and other benefits resulting from our continued cost reduction initiatives.
The increase in total cost of revenue for 2016, as compared to 2015, was primarily attributable to our increase in revenue, including incremental costs of approximately $61.0 million for acquired businesses. In addition, delivery rates and material costs increased in 2016. Partially offsetting these increases in total cost of revenue was the impact of lower order volume for both personal and business checks, as well as forms and accessories sold by Small Business Services. In addition, total cost of revenue decreased approximately $15.0 million during 2016 due to manufacturing efficiencies and other benefits resulting from our continued cost reduction initiatives.
Consolidated Selling, General & Administrative Expense
Change |
||||||||||||||||
(in thousands) |
2017 |
2016 |
2015 |
2017 vs. 2016 |
2016 vs. 2015 |
|||||||||||
SG&A expense |
$ |
828,832 |
$ |
805,970 |
$ |
774,859 |
2.8% |
4.0% |
||||||||
SG&A expense as a percentage of total revenue |
42.2 |
% |
43.6 |
% |
43.7 |
% |
(1.4) pt. |
(0.1) pt. |
||||||||
The increase in SG&A expense for 2017, as compared to 2016, was driven primarily by incremental operating expenses of acquired businesses of approximately $63.0 million, as well as an increase in incentive compensation expense of approximately $5.0 million and investments in various revenue growth opportunities, including marketing investments and higher financial institution commission rates. These increases were partially offset by various expense reduction initiatives of approximately $34.0 million, primarily within our sales and marketing organizations, an $8.7 million gain from the sale of businesses within our Small Business Services segment and lower legal costs. Further information regarding the business sales can be found in the discussion of assets held for sale under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
The increase in SG&A expense for 2016, as compared to 2015, was driven primarily by incremental operating expenses of $51.0 million for acquired businesses, as well as investments in various revenue growth opportunities, and an increase in medical costs of approximately $3.0 million. These increases were partially offset by various expense reduction initiatives of approximately $35.0 million, primarily within our sales and marketing organizations, as well as a decrease of approximately $6.0 million in incentive compensation expense.
Net Restructuring Charges
Change |
||||||||||||||||||||
(in thousands) |
2017 |
2016 |
2015 |
2017 vs. 2016 |
2016 vs. 2015 |
|||||||||||||||
Net restructuring charges |
$ |
8,562 |
$ |
7,124 |
$ |
4,418 |
$ |
1,438 |
$ |
2,706 |
||||||||||
We recorded restructuring charges and reversals related to the cost reduction initiatives discussed under Executive Overview. The net charges for each period primarily relate to costs of our restructuring and integration activities such as employee severance benefits, information technology costs, employee and equipment moves, training and travel. In addition to the restructuring charges shown here, restructuring charges of $0.6 million in 2017 and 2016 and $1.8 million in 2015 were
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included within total cost of revenue in our consolidated statements of income. Further information can be found under Restructuring Costs.
Asset Impairment Charges
Change |
||||||||||||||||||||
(in thousands) |
2017 |
2016 |
2015 |
2017 vs. 2016 |
2016 vs. 2015 |
|||||||||||||||
Asset impairment charges |
$ |
54,880 |
$ |
— |
$ |
— |
$ |
54,880 |
$ |
— |
||||||||||
During the third quarter of 2017, we recorded pre-tax asset impairment charges of $46.6 million within Small Business Services related to goodwill, the discontinued NEBS trade name and other non-current assets, primarily internal-use software. Further information regarding these charges can be found under the caption "Note 7: Fair value measurements" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report. Also during 2017, we recorded pre-tax asset impairment charges of $8.3 million related to a small business distributor that was sold during the second quarter of 2017. Further information regarding these charges can be found in the discussion of assets held for sale under the caption "Note 2: Supplemental balance sheet and cash flow information" of the Notes to Consolidated Financial Statements appearing in Item 8 of this report.
Loss on Early Debt Extinguishment
Change |
||||||||||||||||||||
(in thousands) |
2017 |
2016 |
2015 |
2017 vs. 2016 |
2016 vs. 2015 |
|||||||||||||||
Loss on early debt extinguishment |
$ |
— |
$ |
7,858 |
$ |
8,917 |
||||||||||||||